Qiagen N.V. (NASDAQ:QGEN) Q4 2016 Earnings Conference Call February 2, 2016 9:00 AM ET
Peer Schatz - Chief Executive Officer
Roland Sackers - Chief Financial Officer
Jonathan Groberg - UBS Securities
Tycho Peterson - JPMorgan
Steve Beuchaw - Morgan Stanley
Scott Bardo - Berenberg
Daniel Wendorff - Commerzbank
Derik de Bruin - Bank of America Merrill Lynch
Brian Weinstein - William Blair
Dan Arias - Citi
Jack Meehan - Barclays
Unidentified Company Representative
Thank you Patrick and welcome to all of you and we appreciate you taking the time to join us for this call today. Our speakers are Peer Schatz, the Chief Executive Officer of QIAGEN, and Roland Sackers, the Chief Financial Officer. Also joining us is Dr. Sarah Fakih, from our IR team.
On Slide 2 you'll see the Safe Harbor statement explaining that the discussions and responses to your questions on this call reflect management's views as of today, February 2, 2017. We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations or predictions of the future, and these constitute forward-looking statements for the purpose of the Safe Harbor provisions. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected.
QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For more information please refer to our filings with the U.S. Securities and Exchange Commission. Today, we will also be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles. You can find a reconciliation of these figures to GAAP in the press release and also in the presentation with this call.
With that, I like to now hand over to Peer.
Thank you, John. And I would like to welcome you all to this conference call. As you saw in the press release and in our presentation, our results for the fourth quarter and the full year show an accelerating performance during 2016. Our transformation is building momentum and we move ahead on a new growth trajectory and we are seeing the benefits of strengthening our position as a global leader for molecular Sample to Insight solutions. We are determined to build on this success and make significant progress in 2017.
Let me go through our key messages. First, we achieved our targets for the fourth quarter and for 2016. On a full-year basis, net sales rose 6% at constant exchange rates, which was in line with our guidance for 6% to 7% CER growth, and we’re up 4% at actual rates, due to the 2 percentage points of currency headwinds. Sales grew at a faster 8% CER rate when you exclude the declining sales of HPV test in the U.S.
In terms of adjusted diluted earnings per share at constant exchange rates they were $0.90 for the year or $1.14 per share, excluding the restructuring charge of $0.24 are recorded in the fourth quarter to deliver efficiencies, while sustaining our sales momentum. This was above our target for $1.10 to $1.11 per share at constant exchange rates.
For the fourth quarter, net sales were up 8% CER, but we face 3 percentage points of currency headwinds giving the significant year in shifts and rates. Adjusted diluted earnings per share, excluding the restructuring charge were $0.41 at the constant exchange rates and the adjusted operating income margin, excluded the charge was 31%, which is among the best in the industry.
Second, QIAGEN's transformation is building momentum across our Sample to Insight portfolio. The results for the fourth quarter and also the accelerating performance during the year were important steps towards achieving the new goals we had set for QIAGEN to excel towards 2020 and that we announced at our Investor Day in November. These are for compound annual growth in net sales of about 7% to 9% CER from 2016 to 2020, and adjusted EPS growth of at least 12% CER during that same period. This positions QIAGEN as among the fastest growing companies in our sector.
During this transformation, we have placed priorities on several areas of high growth and differentiation within our portfolio to address urging customer needs. This includes the QuantiFERON latent TB test, a key growth driver. Our teams delivered worldwide growth above the 25% CER target for QuantiFERON and the fourth generation of this test was submitted for U.S. approval.
We’re also pleased to have reached our targets for 55 to 60 new placements of the GeneReader NGS System in the market segment system segment for benchtop NGS Systems, primarily for oncology applications. In fact, we exceeded our goal for at least 10% of new placements in this segment. This is a great result for a system that is primarily used in clinical and clinical research setting, which normally need long validation periods. We look forward to rolling out the comprehensive enhancements in new gene panels announced for 2017.
Related to our initiatives in next-generation sequencing and bioinformatics in January, we announced the acquisition of OmicSoft, a privately held company in the U.S. that complements our industry-leading bioinformatics portfolio. OmicSoft markets, a suite of tools that allow customers to analyze and manage very large NGS data sets in a research setting that increasingly benefits from the power of data sharing.
Third, we are committed to increasing returns and creating significant value. Our conviction about the power of this transformation was shown through our decision in 2016 to set a goal to return $300 million to shareholders by the end of 2017. The first tranche was completed in January with a return of about $245 million through the synthetic share repurchase and we intend to return the balance of the $300 million, through open market repurchases during the year.
Finally, we are reaffirming our guidance for 2017 that we shared with you in November. On a full-year basis, we continue to expect about 6% to 7% CER sales growth and this incorporates the modest incremental contributions from the OmicSoft acquisition. Our guidance for adjusted diluted earnings per share also remains at $1.25 to $1.27 per share at constant exchange rates, excluding the anticipated $0.03 of restructuring cost for 2017.
As a last point, I would like to mention the leadership change mentioned in the quarterly report with the appointment of Thomas Schweins to be head of the Life Science Business Area. Thomas has been with QIAGEN since 2004 and has been an integral part of our Executive Committee during this period. Thomas has extensive industry experience based on this prior role as Head of Marketing and Strategy at QIAGEN where he was involved in managing our Global Life Science business for many years, and also through his previous experience at BCG, as well as Hoechst and Aventis.
Thomas is taking over from Brad Crutchfield, who unfortunately had to step down from his role for personal and family reasons and he is returning to California from his assignment at QIAGEN based in Germany. So on behalf of my colleagues and all of our employees around the world, I would like to wish Brad all the best for his future.
On Slide 5, I would like to now update you on some of the key developments in the fourth quarter. The QuantiFERON latent TB test reached an important milestone when the fourth-generation of the test was submitted for pre-market approval by the U.S. FDA in early January. The recent guidelines from the World Health Organization and the U.S. preventive services task force provide an important tailwind for us, and very recently QuantiFERON was selected in a major government tender in South Korea's part of a national strategy to eliminate TB.
We’re rolling out a comprehensive package of enhancements for the GeneReader NGS System further streamlining workflow efficiency enabling improved data output and shorter turnaround times, as well as significantly broadening our content offering featuring a range of oncology panels and most importantly a channel for customized panel design. I would like to now walk you through each of the key highlight areas in more detail.
I’m now on Slide 6 to give you an overview of the QuantiFERON latent TB test. QuantiFERON continues to be a very exciting opportunity for us and we saw growth accelerating to a new 25% CER pace for full-year 2016, and growing above this pace in the fourth quarter. The submission of the fourth generation test to the FDA is an important step in further driving the adoption of the test in its increased clinical benefits. This follows the successful 2016 launch of QuantiFERON-TB plus in more than 60 countries around Europe, the Middle East, Africa, Asia, and Latin America.
The fact that we submitted the fourth-generation test in the United States is also a good indication that we were able to address the issues raised in an FDA warning letter, we discussed with you last year, and we believe this issue is now fully resolved. During 2017, we will continue to create more awareness around latent TB testing and to participate in new national initiatives to eliminate tuberculosis such as in South Korea.
In the latest milestone, QuantiFERON-TB has won a tender by the Republic of Korea Armed Forces for screening of about 340,000 recruits during this year. This is just one example of many such initiatives we are pursuing and working on around the world. We will also continue to strengthen our QuantiFERON sales team to further accelerate geographic expansion and to drive an even faster conversion of the market from skin test of QuantiFERON-TB.
I’m now on Slide 7 to update you on recent developments with the GeneReader NGS System, our complete Sample to Insight next-generation sequencing workflow. The GeneReader System is really the first purpose-built NGS platform for clinical panel testing and the reception in 2016 was extremely positive. We targeted to achieve about 10% of the clinical oncology benchtop sequencing market in the first year, and we were very proud to announce that we exceeded that target.
We have now set a substantially increased target for 2017. GeneReader is the first fully integrated complete NGS clinical workflow with predictable cost, actionable insights, expertise and services. It also provides great flexibility and this allows even the lowest throughput customers to start NGS sequencing with great economics and also allows higher throughput labs to address their gene panel needs.
Our goal for 2017 is to further accelerate the positive commercialization momentum we reached in 2016 and to fully leverage the benefits of the new system enhancements and the vastly broaden menu capabilities. On Slide 8, you can now see a more detailed overview of the GeneReader enhancements we announced earlier this month. We are pleased to announce that the upgraded capabilities of GeneReader, which are spread across the new and vast content menu exceeds the competing solutions in terms of critical parameters that matter the most in this segment.
We introduced new panel variant types to now also include detection of copy number variations, large rearrangements, exon-skipping events, and gene fusions. With the introduction of our proprietary digital NGS technology, we have boosted accuracy of the GeneReader NGS System to Q60, meaning of 1000 fold lower bass call error rate than the current industry standard.
In addition, we can now detect even the most complex mutations and do so with both formalin-fixed paraffin-embedded tissue and liquid biopsy samples using the same gene panels. This eliminates the need for a specialist panel and significantly reduces the validation effort for every lab. More importantly, a customized channel will be offered for predesigned NGS sequencing assays, and this will open up unlimited panel content to meet the needs of our customers.
To support the integration of the self-designed panels within our Sample to Insight solutions, we will also make customization of our bioinformatics solutions available. The comprehensive upgrade package also includes new sequencing chemistry that will become available during the first quarter this year, higher data output per flow cell, 20% higher sample throughput capacity, and higher batch efficiency.
This is an important next step and a successful rollout of the system one year after launch, keeping up-to-date with the evolution of the technology and we're confident the market is beginning to really understand the value proposition of the GeneReader NGS System as the first complete and economical Sample to Insight NGS System.
On slide 9, I would now like to give you an overview of our personalized healthcare franchise, in 2016 we successfully surpassed the milestone of 20 master collaboration agreements for companion diagnostics with pharmaceutical companies and on the left you can see our selection of our Pharma partners who are running multiple programs with us.
In personalized, we are leveraging our know-how experience and development expertise to bring forward new solutions for patient stratification to capture at least 50% of the available molecular companion diagnostic deals. Our ambition going into 2017 is not just to further increase the share, but also to expand our portfolio of tests beyond our current PCR and NGS focus.
We intend to broaden indications as well. As platforms in our companion diagnostic deals, and expand our track record in oncology and infectious disease and immune monitoring. One example of how we're doing this, is the recently announced partnership signed with Singulex, a U.S.-based next-generation immunodiagnostic company and this collaboration will leveraging new multimodal diagnostic solutions, and highly sensitive platform technologies for select Pharma partners to support clinical trial investigations for a number of disease areas that they are interrogating with immunoassay diagnostics such as cardiovascular diseases, immunology, and inflammation.
I’m now on Slide 10 to update you on the QIAsymphony automation system. We exceeded our 2016 goal of 1,750 cumulative placements and have again achieved solid double-digit consumable growth. Our strategy takes a geographic focus. In the United States, we are primarily targeting areas such as transportation testing, the needs of customers to automate laboratory developed tests, and higher volume sample processing with a wide installed base of many molecular detection message such as PCR and next-generation sequencing used downstream.
In Europe, we are leveraging our broad PCR test menu in addition to the opportunities for sample processing described before, and are adding new test that will create greater value for customers. Our goal is to maintain a solid annual placement rate and reach more than 2,000 cumulative placements by the end of 2017.
I’m now on Slide 11 to review highlights of our Sample to Insight portfolio of Life Science products and workflows that support innovations at cutting edge of research. Differentiated technologies refers to areas that we have identified in academia and other environments as core innovation areas that are building up critical mass and scientific research and have the potential to move into clinical use. One example we talked about often is liquid biopsies.
Today, our market share and processing liquid biopsy samples is well above 80%. At the core of this technology, is really a sample processing channel. We have an extremely strong position in this area for blood based on our workflows for unbiased DNA stabilization and purification with the PAXgene blood system and this has been launched for full automation on the QIAsymphony platform. We are now introducing new and highly specific QIAmp solutions for circulating free DNA that have an incredible DNA capturing efficiencies.
While our previous solutions are a strong liquid biopsy gold standard well ahead of the competitions, these new solutions exhibit for example a capturing efficiency at least three times higher than the performance of competing products in direct head-to-head comparisons. Microbiome is another area in which we have built-up capacities in 2016. In particular with the successful integration of MO BIO into our Sample to Insight portfolio. We have our market share here in sample processing well above 80%, and during 2016 we introduced dedicated assays and bioinformatics solutions to create seamless Sample to Insight workflows.
A further initiative is in single cell research, where we launched QIAscout in 2016 as a single cell selector that integrates very nicely with our sample processing product, as well as assays and bioinformatics solutions. This compact and very cost efficient devise enables a significant number of labs to get involved in this area. And that will further drive democratization of single cell technology. We are developing various technologies to add to this portfolio and we will keep you updated.
On Slide 12, I would like to introduce the latest addition to our bioinformatics franchise, OmicSoft, or small U.S.-based Company which we acquired in January 2017 and which further expands and complements our industry-leading portfolio of bioinformatics solutions. Bioinformatics represent a crucial asset and an integral part of our Sample to Insight portfolios and Life Sciences in molecular diagnostics, and is increasingly becoming a true competitive advantage.
The acquisition of OmicSoft further differentiates our capabilities for data management by adding a scalable and flexible software infrastructure that enables customer to effectively manage and share vast amounts of Omics and NGS primary datasets, analyze and visualize these data sets, and compare them to large and highly curetted publicly available multi-omics datasets.
Data management of these large datasets is very important for all genomes customers and in particular in the clinical community. Data sharing is emerging as an incredibly important need in this new age of genomic testing.
With that, I would like to hand over to Roland.
Thank you, Peer. Good afternoon to those of you in Europe and good morning to those of you in the U.S. I would like to review our financial performance for the first quarter and full year and also update you on our guidance for 2017. We achieved our goals for 2016 in terms of sales, adjusted earnings, and we are particularly pleased with the 22% increase in free cash flow to $267 million.
We have been taking targeted actions to support future sales growth and deliver operating margin improvements after a period of investments, and these results are an important step in setting the new growth trajectory towards 2020. Above all, the support our top priority to increase shareholder returns and create value.
For the fourth quarter, net sales holds 8% at constant exchange rates and were up 5% at extra rates to $366.5 million, due to an unexpectedly strong 3 percentage points of advanced currency movements. This happened later in the quarter with the search in the dollar against the euro and also against the yen to Turkish lira and other currencies.
As expected, about 3 percentage points of growth came from the acquisitions of MO BIO and Exiqon, while organic growth provided 5 percentage points. We also saw the headwinds fade in this quarter for U.S. HPV test sales, which were down largely in line with our 2016 target to about $33 million, compared to $46 million in 2015. To address the issue now, we expect about one percentage point of headwind in 2017.
About in any case these sales are expected to represent well below 2% of the total for QIAGEN in 2017. Among the product categories, we saw solid growth during the fourth quarter and full year for consumables and related revenues. Heavy [indiscernible] sales rise 8% constant exchange rate in the fourth quarter, which was above the full-year rate of 6% full-year growth and providing about 87% of full-year total sales.
Instrument sales also rose at a solid rate growing 6% CER in the fourth quarter and another for 5% CER growth rate for the full year, and providing about 30% of full-year sales. The stronger growth rate in the second half of the year, which led to full-year sales rise in 6% CER in-line with our guidance, reflects the impact of our transformation and the benefits of investments we made to step up commercialization of our growth drivers, and expand into new geographic markets.
So organic growth rates for 2016 was actually right at 4.5 CER had to absorb the U.S. HPV sales headwind. So this provides a good foundation to move into 2017. Moving down the income statement for the fourth quarter, the adjusted gross margin excluding the pre-tax restructurings was rose by a 50 basis points to 71.1% of sales, thanks to better product mix towards consumables.
Adjusted operating income was $44.5 million, but was $112.7 million, excluding the charge. This means, the underlying adjusted operating income margin for the fourth quarter was 31% of sales and in-line with the target we had said and this was due to overall significantly lower operating expenses as a percentage of sales.
As a reminder, the pre-tax restructuring charge was $79.1 million of which about $68 million [Audio Gap] For the full-year adjusted operating income, excluding this charge was 2% to $324.8 million, and the adjusted operating income margin, including the charge declined by about 50 basis points to 24.3% of sales from 24.8% in 2015. The main reason was the decline in the adjusted gross margin, which fell to 70.6% of sales from 71.2% in 2015.
Sales and marketing, as well as SG&A expenses were largely affected as a percentage of sales, while R&D investments declined modestly. Moving further down the income statement for the fourth quarter, adjusted diluted earnings per share, excluding the charges was $0.39 at actual rates and $0.41 at constant exchange rates. The adjusted tax rate, excluding the charge was 15% of sales, which was slightly below our target of 17%.
On a full-year basis, in fact we came in ahead of our guidance with $1.14 per share as CER, excluding the charge and that was $1.11 at actual rates. Here again we had an adjusted tax rate of 16% of sales and in-line with our guidance for about 16% to 17%. I would like to now provide you with an overview of the performance among the customer classes. As noted earlier the acquisition of MO BIO on Exiqon supports the performance in all customer classes and the majority of the sales were in Academia, Pharma and Applied Testing.
Molecular diagnostics sales of products through these customers were up 11% CER in the fourth quarter and rising at a 12% CER rate when excluding the modest headwind from U.S. HPV sales in this period. These results shows the power of our portfolio and led to full-year sales rising 7% CEI molecular diagnostics and advancing 10% CER, excluding US HPV test sales.
Moving to the life science customer class, we saw robust 10% CER growth among applied testing customers in the fourth quarter, maintaining the double-digit CER growth trend from the second and third quarter of 2016. Sales for the year were up 7% CER and as we have noted, these results can be volatile on a quarterly basis, due to customer ordering patterns. After an outstanding performance in the third quarter of 2016, sales to Pharma customers maintained a solid mid-single digit pace in the first fourth quarter rising 5% CER and achieving a full-year rate of 7% CER growth.
Here we are seeing solid consumables growth, but weaker trends in instrument sales and after modestly optimistic outlook going into 2017, given the expectations for increases in Pharma R&D spending. In Academia, sales were up 3% CER in the fourth quarter, thanks to higher consumables sales, but weaker instrument sales and in particular the soft trends in Europe. At the same time, sales for 2016 was 4% CER and we see positive company specific factors supporting our growth prospect for 2017.
I would like to now review our performance across the regions with all regions delivering growth for the fourth quarter and for the year. We were particularly pleased with the ongoing expansion in the top seven emerging markets, which grew 70% CER for the fourth quarter and provided 18% of sales and were up 90% CER for the year. China kept up the double-digit CER growth pace during the year, along with important contributions from South Korea, Turkey, India, and Brazil.
Emerging markets helped drives Asia Pacific, Japan region to the fastest growth rate with sales up 14% CER in the fourth quarter, and 11% CER for the year. China, South Korea, and India were among the key contributors and we saw good expansion in Thailand following our entry. The Americas region showed 5% CER growth for both the fourth quarter and for the year, moving beyond the U.S. HPV test headwinds, thanks to a higher sales of QuantiFERON-TB test, and improved conditions among life science customers.
Brazil also maintained a solid CER growth pace in the first quarter, while Mexico had growth for the year despite a drop in the fourth quarter due to the timing of national tenders. As a last point, the Europe, Middle East, and Africa region delivered 10% CER growth in the fourth quarter, returning to a stronger pace after software trends in the third quarter and resulting in sales for the full year rising 8% CER, and providing about one-third of our total sales.
In this region we benefited from expansion in the markets such as France, the United Kingdom, Turkey, and the Middle East where we opened a new hub in Dubai. This helps to more than offset the software trends in Germany that we have seen during the second half of the year.
I would like to now give you an update on our balance sheet and cash flows, and also on the progress to return $300 million of capital to shareholders by the end of 2017. We had a goal for about $350 million of operating cash flow for 2016 and we came close with $342 million. This compares to $380 million in 2015 and an achievement especially given the currency headwinds against the dollar.
In fact, we had $100 million of operating cash flow in the fourth quarter of 2016 and this marks the first we have reached this quarterly ladder. Our balance sheet benefits from the improving cash flow and our leverage ratio stood at 1.2 times net debt to adjusted EBTIDA at the end of 2016, and this compares to 1.6 times at the end of 2015. We continue to pursue a disciplined capital allocation strategy to support internal business expansion, while also making targeted acquisitions as you saw with OmicSoft and also increasing returns to shareholders.
We just completed the strategic share repurchases on January 24 with a return of about $245 million. This reduced a total numbers of issued QIAGEN shares by approximately 3.7% to $230.8 million as of January 31, 2017 compared to $239.7 million at the end of 2016. We intend to return the balance of the $300 million commitment through traditional market purchases during the year.
Taking into account, the OmicSoft acquisition and the capital return plans the pro forma leverage would have been about 1.9 times net debt to adjusted EBITDA at the end of 2016. However, given our strong cash flow generation, we see this coming down quickly and we have an healthy balance sheet to take advantage of targeted strategic opportunities.
I would like to now review our guidance for 2017 and this remains unchanged from the initial perspectives we gave you in November 2016 at our investor event. We continue to expect about 6% to 7% CER sales growth for the full year and for underlying earnings of about $1.25 to $1.27 per share at constant exchange rates.
In terms of sales growth, we will return to using adjusted net sales due to the OmicSoft acquisition, which is common for IT related views to show the full sales and profitability impact and also what we did in the past with these types of deals. We are currently expecting about 5 to 6 percentage points of organic growth at about 1 percentage point contribution from acquisition of Exiqon, which was acquired in June 2016; and from OmicSoft, which was acquired in January.
For adjusted EPS, this target represents a significant increase from underlying $1.11 per share for 2016. This outlook includes about $0.03 of benefit from the planned $300 million return commitment and initial contributions from the efficiency initiative. It also takes into account an anticipated 18% adjusted tax rate, and excludes the expected $0.03 of dilution from restructuring charges in 2017.
I would like to also provide some estimates about anticipated adverse currency impacts given the swing scene at the end of 2016. Based on rates as of January 31, we expect pressure of about of about 2 percentage points on the full-year CER sales growth target and about $0.02 per share on the full-year adjusted EPS guidance at CER rates. You can find further information on anticipated currency impacts for 2017 based on rates as of January 31, 2017 in the appendix of this presentation.
On Slide 18, you will see information on the details and assumptions for our outlook for the full year and also for the first quarter of 2017. In terms of net sales for the first quarter, we have set a target for about $0.04 to $0.05 CER sales growth in adjusted net earnings. As we noted earlier, we anticipate about 1 percentage points of headwinds from the U.S. HPV sales for the full year, and this includes about 2 percentage points in the first quarter. We have set a target for adjusted diluted EPS of about $0.21 to $0.22 per share for the first quarter of 2017, at constant exchange rates and this also excludes the restructuring charge.
We anticipate about $0.02 to $0.03 per share of restructuring charges to be taken in the first quarter of 2017, and this is part of the full-year guidance for about $0.03 of charge. For the currency impact, based on currency rates as of January 31, 2017, we anticipate for the first quarter about 2 percentage points of headwind on sales at actual rates up to $0.01 on adjusted diluted EPS.
With that, I would like to hand back to Peer.
Yes, thank you Roland. I’m now on Slide 19 for a summary, before I move into Q&A. Let me review what we have announced. First in 2016, we achieved an inflection point for faster sales growth, and took steps to increase operating leverage for 2017 and years to come. Second, our Sample to Insight transformation makes QIAGEN a stronger, more differentiated leader with a momentum across a broad range of molecular testing. We have committed to higher returns and are delivering value creation to shareholders.
As I think you can see from our location of capital and actions to drive improvements in efficiency. Finally, we have affirmed the 2017 guidance we provided in November 2016 and we are executing on actions to deliver higher sales and adjusted EPS with targets to excel through to 2020.
With that, I’d like to hand back to the operator for the Q&A session. Thank you.
Thank you. [Operator Instructions] And our first question today comes from the line of Jonathan Groberg of UBS. Please go ahead.
Hi, thanks a million and congratulations on the end of the year. So, I just have two quick ones, one for you Peer and one for Roland. One, for Peer, can you appreciate some of the initial specifications on GeneReader which sound impressive, I’m wondering if you can give any more concrete expectations for 2017 financially that we might expect from that product? And then Roland for you, we have historically not talked much about as free cash flow, you had a 100% free cash flow conversion of your adjusted net income, I’m just curious is that a one-time phenomenon or is that something we can now expect going forward? Thanks.
Great, thanks Jonathan. So, to the first question, we announced the placements for 2016. We are just shy of 60 placements for the year. For 2017, we expect a significant increase, it’s not 20% or 30% increase, this is a significant increase in placements, but we really want to focus on the market share. We think there are about 500 to 600 systems that are replaced every year and benchtop oncology in 2016, we expect that segment to grow very rapidly over the next few years. And by the year 2020, we expect to have 20% overall market share in this market. So, we're going from a percentage of new placements to an overall market share in that time period. So this is a substantial expansion of the footprint.
We are not really going to see a lot of benefit or we don't really see a lot of benefit of not giving a concrete placement number for 2017 because it is clearly something that is very important competitive information. We will however shed further light on how the roll out improves going forward. It is part of our plan for 2017, you shouldn't expect percentage points of contributions to the overall revenue growth, but it will for the first time be measurable. So this focus that we have is more now in the year 2020 to target a 20% market share.
And the cash flow I think, absolutely I think the free cash flow for $267 million was clearly roughly 22% improvement compared to the year before and I would say also looking forward, we feel I would say quite good about our cash flow generation opportunity because on the one hand side, we I would say you have a nice operation globally where we could see still leverage opportunities and therefore no really significant need for a larger in general capital investments and therefore the cash conversion rates would stay above 100% and as you know we gave all the, I would say good commitment on operating cash flow for 2020 and we are working through that and that should also flow through down to free cash flow as well.
And our next question comes from the line of Tycho Peterson of JPMorgan. Please go ahead.
Hi thanks., Couple on QuantiFERON, can you talk to the degree to which there are other major tenders out there like you saw in Korea? How penetrated is the U.S. market and what’s the impact you think from the new guidelines, and are you still making channel investments there in terms of building up the sales force?
So, the answer to the first part of the question is, yes there are and many countries around the world that are currently looking into segment specific or even broad-based screening efforts and the reason why we announced this tender, it is 350,000 tests it’s obviously a nice size, but wouldn't necessarily warrant publication more from the fact that this was done because this was a highly visible and highly anticipated tender.
Korea is one of the countries that has a higher prevalence of latent TB and at the same time has a very high standard of development clearly, and so this has been watched very closely because there is a very efficient and large-scale initiative underway in Korea to battle latent TB. But there are many other countries around the world, I could list at least a dozen that are currently looking at larger things and many more beyond that. And this was therefore important for us to announce because again as signaling effect, there is a signaling effect from this decision we believe.
In terms of the penetration, the U.S. market is still substantially under penetrated. We believe that it’s maybe a quarter penetrated in some of the are you penetrated segments, but we continue to see new segments emerge that are still at very low penetration levels, so the hospital workers, the healthcare workers is the highest penetration anywhere between 25% and 35%, but you still have even very advanced institutions still working on skin test, and that is why we continue to invest in the sales channels that educate the market and help continue and further accelerate this conversion. Roland?
Yes. I'm not sure if there was - I didn't get a second question for me sorry.
Okay. So, I misunderstood that. Okay. Shall we go to the next one?
Our next question comes from the line of Steve Beuchaw of Morgan Stanley. Please go ahead.
Hi, good morning and good afternoon and thanks for the time here. I wanted to ask just an open-ended question about the outlook for organic growth for 2017, but we’ve clearly seen a lot of improvement in organic growth profile, I think that is in part product and part execution, it seems like, based on the guidance for the second half of 2017, the implied guidance I should say, that it is quite a bit that you see in the funnel maybe it’s tender activity that gives you confidence and this continuing improvement in terms of organic growth. So, I wonder if you could speak to beyond QuantiFERON, which we understand has a really strong trajectory, what else do you see in the order funnel that gives you so much confidence in the acceleration on, let's call it a basis that considers tougher comps in the second half of the year? Thanks so much.
Sure thanks. Well, I think the growth going forward is driven on multiple pillars, so it’s much more differentiated growth engine than it was a few years ago, and that was one of our key goals in the transformation. So QuantiFERON is certainly just because of the size and the high growth of this franchise, a major contributor to the organic growth, but we also have other strong contributors, we mentioned GeneReader before which if you just sum up the numbers and look at the pull-through in terms of consumables that we outlined last time 150,000 to 200,000 in panel throughput per system, even on limited panels. That clearly gives you a good contribution to the overall organic growth.
And on top of that, we, over the last few years have invested heavily in invigorating and targeting our life science franchise to higher growth segments and that was actually a much more significant initiative that meets the eye and also visible from some of the new product launches and the attraction that they are getting and so there is a real exciting range of growth initiatives that are starting to generate significant momentum and contributions. So those would be three larger contributors that we would see you for 2017.
QIAsymphony just continues to be a star and we're winning tenders around the world also in infectious disease and just want to big HIV tender, yesterday and a big hepatitis tender couple of weeks ago. And so we have a very broad menu in Europe that we're marketing throughout all CE relevant regions and that is driving a lot of assay growth and consumables growth and the new capabilities QIAsymphony liquid biopsy just as an example is driving a lot of growth in the U.S. So that focus, the targeting of these on high growth initiatives was not only confined to these very high profile areas, but really is a philosophy that we mirrored into the whole organization.
And our next question comes from the line of Scott Bardo of Berenberg. Please go ahead.
Yes, thanks for taking my questions. First one just relates to QIAsymphony; obviously encouraging to see you doing good placements there and you talking about double-digit consumable pull-through. I wonder if you could just give us an update actually as to what the absolute pull-through number is per box now. And really, specifically, if you could give us some sense of what the revenue base, what revenues per division roughly, is QIAsymphony? That would help us understand, or better understand that as a growth driver per the division. So, if you could give us some more color around that, appreciate it. Bigger picture question for Peer, and just with reference to beta sharing and bioinformatics. Obviously, this is a rapidly evolving field. You've seen Phillips now collaborate with Illumina, IBM Watson machine is aggressively moving into the space. So, what I wanted to understand was, do you as QIAGEN have enough, if you like, connectivity and data sharing capabilities to optimize this opportunity in population health and any other direction that this genomic information may take? Thank you.
Roland, do you want to take the QIAsymphony one?
Yes absolutely. And, hi Scott. For the pull-through as we said in November, as well QIAsymphony is the one 80,000 per machine and it is probably as well as an average for the full year at year end. And clearly, if you look on the number of placements, most of them are [indiscernible] so it is probably a little bit more than half. The second area where we had over the last two years of strong performance is clearly within life science applied testing area, and then it fully distributes in general into the Pharma part of the business as well. So, it’s, I would say a fair share in all areas, but more than half in molecular.
Scott you are asking a very good question. The bioinformatics market, well it is still very small is very, very fragmented, and the different tools are very synergistic. So what larger diversified healthcare companies, you mentioned one with Phillips are clearly trying to do, they are trying to create integrated software platforms where the various data creating instruments or units can feed their data into to create a centralized data management and basically also help guide diagnosis and improve outcomes. This is much more comprehensive and not an area that we would go into.
We are sticking to genomic analysis and in genomic analysis this is primarily our capabilities are an interpretation. And this area of interpretation there are several different strategies you can take. You can use literature and we have seen that even the most advanced and we have a lot of work in this area that most advanced artificial intelligence still does not come anywhere close to the curation by physicians and PhD's. And this is why we have an extremely elaborate creation process. We think it will take quite some time to get there and even more time to further establish and validate.
So the literature base, knowledge bases that we have, the algorithms that we’ve created, they can easily be translated to AI and we can upgrade them at some point in time in the future, but that is today an absolute go-to resource and this is why we have, these massive market shares in particular are some clinical interpretation, but also in the life sciences. And the second is, then the data sharing capabilities and to create these repositories and be able to data mine and OmicSoft surprisingly with a very small revenue base and size of a company has signed up the most prestigious institutions around the world to create these types of data repository and mining capabilities.
So our strategy is to be very, very focused and not venture out into areas that we think other companies in IT will be able to address and stay very close to our molecular Sample to Insight core philosophy and capabilities. And in those areas we have very high market shares. And that I think we see a lot of things happening are actually good for our industry because they will allow us to further plug into this increasing momentum that everybody is building.
Our next question from the line of Daniel Wendorff of Commerzbank, please go ahead.
Thanks for taking my questions. Two small follow-ups, to be honest. One with regards to the QIAsymphony placement; you are targeting more than 2,000 total placements until the end of the year. I wonder if you could give us any idea of what the total amount might be you would be able to place. I think I recall from the past that you said something like 3,000, a bit more than 3,000, has this changed now? With NGS coming into play? And second question would be a follow-up question on the GeneReader. If you look at the numbers you placed in 2016, can you potentially quantify what were straight sales and what amount of machines you placed on your new PPI model? That would be helpful, thank you.
Right. The reason why I was struggling - sorry for interjecting - is because GeneReader continues just to be an extraordinary and we had once again a significant over performance in QIAsymphony in 2016 in head to head competitive wins across all of the different disease areas in Europe, and Europe is a totally different market than the United States in terms of what wins and what doesn't. And in the U.S. we have such an outstanding set of capabilities that we are continually also expanding and upgrading in terms of - we have today hundreds of protocols for QIAsymphony.
I think on cell-free DNA we think even have, I think there are 180 different variants that we are offering customers and because people have different downstream assays in different specifications. It is just such a versatile and broad capability system that we currently in our five-year projections do not see that this will significantly taper off over the next years and so what we get guided for was at least 200 systems on average per year over the next few years, and that I think was a conservative number that we are targeting through 2020, and thereafter I think this will continue.
I wouldn't be surprised if QIAsymphony is around another 10 years. It’s a very strong platform. In terms of the GeneReader just to, the majority are price per insight that has been very positively received model by our customers and so that that will start reflecting in our P&L once they start running the panels.
And I think it is also done, just to add on to that, to the question we had before in terms of revenue impact in 2016 and 2017, so as [indiscernible] Consumables the story, you can see the actuation is clearly something what was driven by the consumer one with all the close of 2016 and moving into 2018 and beyond.
Our next question comes from the line of Derik de Bruin of Bank of America Merrill Lynch. Please go ahead.
Derik de Bruin
Hi good morning.
Good morning, Derik.
Derik de Bruin
So a couple questions. One, can you quantify the OmicSoft revenues? And on the second point, what was the organic revenue growth number ex acquisitions in the academic market? Looks, by my calculation, looks like it was negative this quarter, and I guess could you sort of talk about what's going on in the academic world right now from your perspective? Obviously there's a lot of moving parts in terms of government funding both in the U.S. and abroad. Thanks.
Right. So for OmicSoft, we put in the press release that it would add maybe half a percentage point of revenue to 2017 because we bought it earlier in the year that would be pretty much a full year number. The reason why we are a little bit vague on it is because as always there are products within the portfolio that we might want to discontinue because the company is very close to what we are doing and some of the products might be an overlap and so this is something that we are currently evaluating if and how we should position that, but in general it’s not really material for the overall year, and with half a percentage point it would already be a very good number.
So, in terms of the academic markets, indeed the academic markets in particular in Europe, but also partly in the United States were choppy. We had continued weakness in the European Academia markets that we saw less so in the second and third quarter, more in the fourth quarter, but we attribute this more to temporary effects in Europe versus in the United States there is definitely an uneasiness in the U.S. academic markets. Also questioning what the long term trajectory of funding will be in this area and so there is some nervousness in the U.S. academic sector. That, those two factors led to a softer Q4 in Academia, but we don't see this as something that we would expect to have to continue into 2017.
Our next question comes from the line of Brian Weinstein of William Blair. Please go ahead.
Hi guys, thank you for taking the questions. One short term and one longer term question. On the short term, I just want to make sure I understand the Q1 guide being kind of 4% to 5% CER in the full year, higher than that. As I understand, HPV is a bigger impact in Q1, but is there anything else that we should be specifically considering as a headwind in the first quarter? And then longer term, Roland, for you, you've done a nice job with cash flow, it's just around $350 million this year, but can you go over again how that bridges to the $600 million that you were expecting for 2020? Thank you.
Yes, let me start this second one on the cash flow generation, as you said, I would say it is clearly a good story in terms of both working capital improvements and I would say single biggest driver over the next year will be clearly inventory management, as you know especially 2016, I would say we were still not there. We would say an average year could be costs driven by transformations by transformations and in-sourcing of productions around QuantiFERON, so you work with the larger inventory stock. You clearly had a year with a significant instrumentation introduction, that also typically something what you want to increases inventory levels. So I would believe over time, our inventory levels from around 160 days can go down to 110 days and therefore I would say that it is one single, quite significant contributor first of all.
And second one is clearly a general cash conversion and those take a very positive as you have seen the results, an overall 12% CAGR on the EPS line until the 2012, including 2020. And if you just more or less take that as a basis, you can see and expecting a very reasonable CapEx spending what we're having right now want 4% that we would be getting there without any larger stretch and therefore I would say that is something where we have seen not only last year, especially in the fourth quarter, but also in the quarters before that the cash conversion ratio in cash is very positive and of course heavy mindset, of course I would say in the first two quarters. This year we will see some payouts from the restructuring, that were recorded last year, cash balances have been this year, but besides that impact I would say we are continuing to see it directly going forward as well. And your first question was on?
First quarter, again, let me just remind you that in general we see a similar pattern that we have seen last year. We anticipate having about 47% of total in H1 versus 53 in the second part of the year and that is trends you have seen largely also in the last three years. So, I would say very well aligned and with the explanation Peer has given before there is clearly a lot of growth coming not only on QuantiFERON and GeneReader, but also the new production implementations within life science. We actually feel quite confident in moving into the year and I would say it is a little bit too early to increase that guidance before we even ask to the first quarter, but I would say the confidence level is good.
Our next question comes from the line of Dan Arias of Citi. Please go ahead.
Good morning guys, thanks. Peer, just a follow-up on the answer - the answer to the question on QIAsymphony. Do you feel like the next tranche of placements this year kind of has the same geographic mix as what you've done to date, or are you expecting the U.S. proportion to be larger, or I guess maybe smaller giving the EU momentum? Just some curiosity on the regional expectations there. And then if I could ask a follow up, sounds like you're feeling pretty good about the comparative metrics on the GeneReader, do you feel like this is a year where it will start to see some published or presented data either on performance or cost relative to the other platforms, that kind of to your point drives home the message on the advantages of the platform? Thanks.
Right thanks Dan. So, first question on QIAsymphony, the mix and I have to go back to the exact numbers, but it is pretty much 40, 40, 20; I mean 40, US; 40, Europe; and 20, rest of the world and there is obviously volatility in that depending on larger orders and tenders and intra year trends. But the - so the placements of QIAsymphony are pretty even across the world. In Europe however it’s used as an integrated, fully integrated molecular diagnostic platform where people are running QIAGEN HIV tests, QIAGEN Hepatitis tests, and QIAGEN hospital-acquired infections and so on. And in the United States it is primarily running sample technologies. So, upfront to PCR, upfront to NGS, upfront to arrays, and - so the use is very different. In Asia, it is a targeted menu of approved tests as well, less broaden in Europe.
So the actual placements of the QIAsymphony SP front-end system is going to be pretty comparable I guess. The consumables turn is more weighted to Europe because we are adding in addition to the sample technology, also the test. In terms of the GeneReader, yes you have already seen in the fourth quarter, first papers come out demonstrating the performance, so there were presentations and posters, about a handful. And there are several conferences coming up now in the first quarter, and in 2016 what we did was an enormous enormously targeted launch only with one panel with a very targeted customer group, tightly controlling the message and many of them have been generating data. And this is what you will start seeing coming out.
And just maybe for the broader audience here QIAsymphony targets a segment of next-generation sequencing, but it does in this segment an extremely good job, it is not a whole genome or whole exome platform or more for exploratory sequencing, it is a purpose-built clinical panel sequence and in this area really excels. So, I think the number on the accuracy that I just noted and some of you might have noted that that we are now routinely demonstrating Q60 accuracies, which is really a substantial improvement and this is a combination of the sequence of the panel technology and Informatics, everything. So the two hour power of the fully integrated Sample to Insight solution coming to play.
And our last question for today comes from the line of Jack Meehan of Barclays. Please go ahead.
Hi thanks for squeezing me in. Peer, could you discuss some of the trends you're seeing in the assay revenues within personalized medicine and any update of views you have on the reimbursement rate environment? And then for Roland, just any changes to the plan for headcount within sales organization investment? Investment there for the year? Thank you.
So you are right to point out that as an area that is very murky at the moment, difficult to interpret, and we have actually seen that as a positive because our well validated FDA approved CE marked highly validated tests where we actually did cost-effectiveness studies and have very solid reimbursements in most countries around the world. The therascreen PCR test, they are actually very solidly performing, and we are adding new test to the portfolio. We for instance launched a new Cal-R test, which is used in the area of blood cancer.
So, we have a very strong franchise in Europe and the rest of the world also in the United States. And this is going to continue. So I think that religion war, will it be PCR assays or NGS assays? The two will be used concurrently and we are actually seeing customers run both of our families of products in parallel and for - and just basically optimizing the use of both.
I wouldn't expect a significant change for 2017 in this area, and the fact that we actually had the LDT guidance, get removed is possibly something that payers will have to deal with at some point. So, we see that the payers will probably prefer more validated test going forward if FDA is not going to regulate some of these tests. So, we don't see a negative for the existing franchise, we actually see a positive for some of our GeneReader assays where a lot of these platforms are used in combination with LDTs.
And on the sales and marketing expenses, it’s what I had said clearly are of course make dedicated and focused investments in areas we expect incremental growth. And as we said during the call, QuantiFERON is clearly one area where we expect it for quite a long time. At the same time it is quite obvious that they have other areas where we now will see, especially with efforts we have done over the last few weeks and months contributions going forward as well.
And therefore I would say that relatively the costs are going to improve and therefore you will notice from the outside any investments, you would rather see it probably the absolute numbers stays quite fixed on the same absolute level over the next few quarters, but within that of course there is an ongoing allocation into areas where we expect an incremental growth going forward.
So with that I would like to close the call and as the last plan, I would like to mention that QIAGEN would be at the Association for Association for Molecular Pathology meeting in Berlin from April 3 to 5. There is going to be an important clinical genomics conference in Berlin. And look forward to any of you who are able to attend that conference and chance to meeting in person in Germany.
And with that, I would like to close this call and thank all of you for your participation.
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